Be greedy when others are… greedy?
This is by far the most common thing I hear when equity prices trend down:
"Be greedy (buy) when others are fearful, and be fearful (sell) when others are greedy"
Shoot, I have told myself this when dip-buying in the past!
But in a transition to trying to place trades based on what is statistically most likely to provide returns, I decided to investigate further: Is buying when the market is fearful actually a good idea?
At first, one would be inclined to first examine the $VIX here - thinking "when markets are fearful, volatility must be high, right?"
So, let's plot the 30-day returns of the $SPY (as a %) against the VIX at the beginning of each 30 day window:
Wow, we actually see the opposite - when the VIX is below 20, the average 30 day window provided positive returns, but as the VIX climbs above 20 toward higher levels, we see a large shift to primarily negative returns. Above 44, no positive returns within 30 days.
So then, is low VIX the best time to go long?
Well, if we plot the rolling mean 30-day returns at each level of VIX, we can examine this trend toward negative returns driven by higher volatility:
Or, if box-plots are more fitting for your statistical palate:
And yes, we see that within a 30-day window, the average return is negative when VIX is above 30.
Well - maybe we should use the Fear and Greed index instead, right?
You know, that nice measure @CNN shows us every day so we know how to feel about the markets!
Sure, let's look at historical readings on the Fear and Greed index, and scatter them against 30 day returns:
Hm, odd - remember a read of zero on this scale would be classified as most fearful, 100 as most greedy...
So what gives?
Same result -- Fearful market sentiment as measured by the certain geniuses at CNN also prove to indicate a poor time to long equities.
You're thinking, "30 days isn't long enough, I'm a LONG term investor, Sam!"
Sure, no problem - here is the same information for 15, 30, 60, 90, 120, 180, 255, 400, 900, 1275, and 3000 trading day windows - just to suit your fancy:
And indeed, this is the case for even long duration investing windows.
In the extremely long duration windows near the bottom, we see all positive returns - of course since the $SPY has an, overall, small upward drift.
But even in the most extreme case of 3,000 day return windows, there appears to be no argument for investing during 'extreme fear' vs any other 'Fear and Greed' environment, since the returns are no higher.
I was pretty surprised by this data in all honesty, since the contrary seems so logical - "I am getting an upper hand by thinking the next step ahead here!"
But in reality, with market liquidity growing and growing, we might just remind ourselves that we have no idea what the heck the future holds - and it may be better sometimes to let the herd go where the herd is going rather than always trying to be a sheep-dog.
As a last aside, we examine the recently stellar performance of long equity portfolios (and consequently the number of analysts who claim to really know what they’re doing), and note that we are sitting in the midst of an extraordinary period of low volatility:
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Cheers,
Sam @ Kurtosis Capital, LLC
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This analysis and article are for informational purposes only and should not be considered financial advice. Investment decisions should be based on individual risk tolerance and financial goals. We do not make personal investment recommendations and only provide research insight in the form of opinion articles.
